Takeaways from the surprise Altice-ESPN carriage agreement
SPN’s recent negotiations with Altice had all the makings of a good, old cable carriage fight, the kind that blows up every couple of years and resets the cable business.
You had a distributor in Altice, which had been public with its desire to cut costs, negotiating with the most expensive TV channel by far. Distributors have long complained about programming costs rising faster than revenue, and many distribution executives hoped that Altice would drive a hard bargain and set the market.
You had a network in ESPN that had been pilloried for months by financial analysts who worried that a declining subscriber base combined with increased rights fees spelled trouble for the media company.
You also had public sniping between the two companies, which tends to presage an extended public and bitter dispute.
|Altice’s footprint is full of New York Yankees fans wanting to see the wild-card playoff game.
But Altice and ESPN surprised the media business by reaching an agreement hours before ESPN was due to go dark.
Details of the agreement have been hard to come by for the deal that was announced officially last week.
Here are the most common questions being asked so far about this deal.
■ Who won?
ESPN is the clear winner, at least based on initial reports. It averted a standoff and added SEC Network and ACC Network on a cable system that covers the New York area market. ESPN secured a rate increase for its channels and got Altice to increase its minimum household penetration threshold, sources said. But sources cautioned me from declaring ESPN as the unquestioned winner based on one open question: We still do not know specifics about where that minimum penetration threshold is and how much flexibility Altice has to launch and market lower-cost tiers that do not include ESPN. ESPN deals typically mandate that it must be on a cable operator’s most widely distributed tier. As “cord shavers” continue to migrate to skinny bundles, those most widely distributed tiers become smaller. The key to the Altice deal is finding out how ESPN addressed that situation. “The rate increase is just window dressing in comparison,” one veteran media executive said.
■ Altice has around 2.5 million subscribers. Why does this deal matter?
This deal starts a new cycle of affiliate deals for ESPN and provides a blueprint for how those future deals will be negotiated. ESPN’s next negotiation will be with Verizon Fios at the end of 2018, followed by Spectrum in mid-2019 and AT&T in late 2019, sources said. It seems likely that those negotiations will take a similar path as Altice’s.
■ What are the deal terms?
Here’s what we know, based on several sources with knowledge of the negotiations: The deal runs for four years and includes an annual increase of at least 6.5 percent for Disney’s suite of channels. Specifics on ESPN’s minimum household penetration guarantees are not available, but a network source said ESPN was able to increase it.
■ What did Altice get out of the deal?
Altice will drop ESPN Classic and get more access to video-on-demand programming. While ESPN negotiated increases in rates and minimum penetration levels, it fell short of its initial ask, sources said.
■ Did the Yankees playoff game matter? After all, it was only one game.
Cable industry veterans told me not to minimize the impact of ESPN’s exclusive coverage of the New York Yankees wildcard playoff game last Tuesday night. Altice’s footprint is filled with Yankee fans who wanted to see that game. Given subscriber losses that have affected the entire pay-TV industry, it seems clear that Altice did not want to risk losing any number of subscribers, especially with an agreement appearing to be so close.
■ What was the biggest surprise?
I am blown away by the fact that ESPN was able to get carriage for both ACC Network and SEC Network on cable systems that span Connecticut, Pennsylvania, New Jersey and New York — areas that never will be confused for Tobacco Road or Tuscaloosa. ACC brass, in particular, have to be overjoyed, as this one deal makes its planned 2019 launch as close to a sure thing as you can get.
■ How does ESPN’s planned over-the-top service factor into this deal?
Distribution executives view all over-the-top services warily. They hate the fact that programming networks are creating more options for cord cutters. Sources said that ESPN reiterated that its planned service will not carry programming from any of its TV networks. It also set up a partnership that allows Altice to sell OTT subscriptions at a discount to its Optimum video subscribers. It’s not clear how much that discount will be.
■ What’s the biggest takeaway?
Reports of the cable bundle’s death are greatly exaggerated. Cord cutting and cord shaving are happening and are a threat to the pay-TV business. But this deal suggests that distributors and programming networks will work together to try to keep the pay-TV system afloat. The pay-TV dynamic will not dramatically change for the next five to eight years, for programming that matters.